By Max Sato
(MaceNews) – Rising energy and commodities prices may help lift Japan’s near-zero inflation rate but a further rise in the costs for daily necessities would dampen already wobbly consumer spending and surging producer prices would hurt small businesses that cannot pass higher input costs on to customers amid uncertain growth prospects.
Japan is revisiting the debate over “good inflation” versus “bad inflation.”
The former can be accepted if the economy’s growth potential increases, the negative output gap is closed and real wages pick up in line with economic recovery. But that will depend on how fast the country can transform its structure toward digitalization, greener production, higher labor mobility and more sustainable public pension and medical systems.
At this point, the risk is on the downside for economic growth amid the lingering drag from the pandemic while input costs for many firms are on the rise due to global supply chain constraints and the depreciation of the yen will push up import prices further, undermining Japan’s purchasing power.
The government has been raising minimum wages in recent years but average real wages grew just 0.2% in August from a year earlier, when the pandemic pushed them down by 1.4%, while nominal wages rose 0.7%.
The key index of domestic producer prices measured by the Bank of Japan jumped a preliminary 6.3% on the year in September, the seventh consecutive gain after rising 5.8% in August. It was the largest gain since September 2008, when the corporate goods price index rose 6.9%.
While some companies are passing high material and labor costs to customers, consumer inflation in Japan remains subdued, just above zero, and is expected to pick up only gradually up to 1% at most in the next few years.
Yet many households are feeling the burden.
Higher costs for energy and processed food continued easing the downward pressure on Japan’s core consumer prices, flat on the year through August after a year-long decline. At the same time, overall energy costs rose 5.5% on year in August and gasoline prices jumped 16.9%. Electricity charges now posted a year-on-year rise, up 0.9%.
From the macro-economic policy viewpoint, a further depreciation of the yen from the current level of about Y114 to the dollar at a rapid pace would prompt Japanese policymakers to pay a closer attention to the impact of a consistently weak yen.
It would hurt households and small businesses while it would not boost export volumes much as Japanese manufacturers have already relocated some of their factories overseas to better serve local needs and alleviate the impact of a strong yen, which could erode their repatriated dollar revenues.
Under such circumstances, one might see a mirror image of what happened about six years ago: verbal intervention. In the 1990s, Japan did sell dollars for yen to stop the disorderly rise in the U.S. currency, but since then forex market intervention was conducted to stop the yen’s precipitous rise.
In the past, Ministry of Finance officials have testified in parliament that Japan was accumulating foreign reserves for a future need to intervene in the market to sell dollars in the event of a disorderly rise in the U.S. unit.
Japan has not intervened in the forex market after having spent Y9.09 trillion on selling yen for the U.S. currency in the final quarter of 2011.
As an example of a verbal intervention, Bank of Japan Governor Haruhiko Kuroda said in his parliamentary testimony on June 10, 2015 that the yen was unlikely to continue depreciating from the existing level, triggering the dollar to slip below Y123 after its recent climb above Y125.
His remarks reflected the concern shared among Japanese policymakers at the time that a sharp fall in the yen’s value would push up import costs further and hurt households and small businesses at a time when consumption had been slow to recover from a protracted slump caused by the April 2014 sales tax hike.
“A rate hike by the U.S. Federal Reserve Board may not necessarily cause the dollar to appreciate and the yen to depreciate,” he told the Lower House Financial Affairs Committee. “The dollar does not have to rise further.”
Asked about the dollar’s recent rise to a 13-year high of Y125.86 at the time, Kuroda replied, “The real effective exchange rate is unlikely to swing toward a further yen depreciation under the normal circumstances.”
Soon after Shinzo Abe returned to power as Prime Minister in late 2012 with campaign promises to “correct the strong yen” and “regain Japan,” both government and BOJ officials focused on the positive effect of the weaker yen on exporter profits and share prices.
But as the weak yen failed to boost export volume so much and rural areas and small firms continued to lag in a modest economic recovery, policymakers began to highlight the negative impact of the falling purchasing power. They also said the excessive appreciation of the yen had been corrected.
In December 2017, Kuroda said the depreciation of the yen to around Y118 to the dollar at the time was “not surprising,” indicating its benefit of supporting exporter profits is still greater than its cost of pushing up import prices for smaller firms and households. “The current foreign exchange rate was seen around the start of this year and so it is not surprising,” he said.
That was a piece of information reinforcing the conclusion that Japanese policymakers appear to be comfortable if the dollar/yen exchange rate remains stable in a range from around Y105 to about Y115, or in a wider Y100 to Y120 range.
A few years after the yen hit a record high of Y75.54 to the dollar in 2011, Japanese ruling party politicians saw a dollar above Y105 as having corrected the yen’s steep rise. But they also feared a level above Y120 would hurt small businesses and households with higher import costs.
In his parliamentary testimony, the then Deputy Prime Minister and Finance Minister Aso Taro made similar forex comments in 2016. At the time, Aso told the Upper House Audit Committee that Tokyo would notify Washington of its intention to intervene should forex market volatility increase sharply.
“The yen appreciated to the Y105 level last week but it is now around Y107.30. We are not at the stage of doing anything particular,” Aso told the committee on May 9, 2016.
A few years later, Aso said the yen’s recent appreciation at the time was not too steep, and thus that it would not prompt Tokyo to intervene in the foreign exchange market to stop a rising yen from hurting the economy.
“It is true that we have done verbal interventions in the past when something urgent happened,” Aso told the Lower House Budget Committee on Feb. 15, 2018. “But now the economic fundamentals in both the U.S. and Japan are very good.”
“The current situation is that the yen has not sharply appreciated or depreciated. We are not considering intervening immediately at this point,” he said.
Aso was asked whether the dollar’s fall below Y107 would hurt the Japanese economy by reducing exporter profits. The dollar was quoted around Y106.60 in Asian morning trading that day, down from above Y112 at the start of the year.
Japanese officials generally do not draw a line in the sand, aware of the strength of market forces when trading surges in one direction, and aware of the fact that ineffective intervention to sell yen for dollars would only provide speculators with an opportunity to sell dollars again.
However, judging from past record, Tokyo would seek Washington’s consent to step into the foreign exchange market to stop one-sided, rapid dollar selling for yen that could wipe out exporter profits and undermine a recovery in the stock market and economic activity overall, in turn denting U.S. exports to Japan.
There was a rare moment in the recent history of Japan’s currency market intervention when a finance minister disclosed specific levels at which the Ministry of Finance took action. It was during a brief three-year period to late 2012, when the Democratic Party of Japan was in power.
Jun Azumi, the then finance minister, said in his parliamentary testimony on Feb. 10, 2012 that Japan would continue countering speculative moves in the foreign exchange market, regardless of dollar/yen levels.
He told the House of Representatives Budget Committee that Tokyo’s solo interventions in 2011 had “some impact” on the dollar/yen exchange rate, which was initially lifted by about Y3 from a record low of Y75.32 hit on Oct. 31 and generally stayed in a range of Y77 to Y78 through yearend.
In a surprisingly candid tone for a finance chief, Azumi said he had instructed a forex intervention when the dollar fell to a critical level of Y75.63, and that Japan stopped massive dollar buying for yen after the U.S. currency had recovered to Y78.20.
MOF data showed that Japan intervened in the foreign exchange market on Oct. 31, 2011, when the yen hit a fresh life-time high of Y75.32 versus the dollar, and conducted further yen-selling operations from Nov. 1 to Nov. 4.
In 2011, Tokyo also conducted currency market intervention in March and August with the former operation forming part of a coordinated move by the Group of Seven industrialized nations to aid Japan in the wake of the March 11 earthquake disaster.
That intervention was the first concerted G7 forex action since September 2000, when the euro came under heavy selling pressure as capital flowed into the U.S. stock market at the peak of the IT bubble.
In September 2010, Japan’s foreign reserves were pushed up by its large-scale forex intervention to sell yen for the U.S. currency – the first government intervention in over six years – in a bid to prevent the yen’s rapid rise from hurting exporter profits and thus a sustained economic recovery.
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Contact this reporter: max@macenews.com
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